Halliburton's KBR IPO: New Political Landscape, New Risks

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KBR Spinoff Raises Reward and Risk Issue [Houston Chronicle]

Summary: Next week, shares of Halliburton's engineering and construction unit KBR Inc. will begin trading on the NYSE. KBR is the U.S. military's top contractor in Iraq. Last quarter, work in Iraq generated half of KBR's $2.4 billion in revenue and $45 million of its $98 million in operating income. KBR was accused of overcharging the U.S. government for its services, a dispute it had resolved but that might reemerge now that the Democrats have taken Congress. Many believe KBR received preferential treatment in both the original bid and the charges dispute because Vice President Dick Cheney used to be Halliburton's CEO. Aside from the closer scrutiny the company is likely to receive from the newly constituted House Government Reform Committee, its business may shrivel substantially now that a new defense secretary is in place and the Democrats have new influence on the progress of the war. Still, the Street is viewing KBR as a competitively priced issue at $15-17, and the company's position as the leading global contractor for liquefied-natural-gas plants should keep it comfortably generating revenues. Whatever direction KBR's stock takes, the spin-off is seen as good news for Halliburton, which can now distance itself from KBR's controversial military contracting work and focus on its own oil-field-services business.
Related links: Additional coverage: Wall Street Journal • Forbes • Commentary: Halliburton's Problems Are Spreading Like Kudzu • Halliburton Company: Windfall of War • Earnings conference call transcript: Halliburton Q3 2006
Potentially impacted stocks and ETFs: Halliburton Company (HAL) • Competitors: Schlumberger Ltd. (SLB), Technip (TKP) • ETFs: Oil Services HOLDRs (OIH), iShares Dow Jones US Oil Equipment Index (IEZ), PowerShares Dynamic Oil & Gas Services (PXJ), Vanguard Energy ETF (VDE)

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